Imagine that the next time you visit a restaurant. The kitchen prepares the food and a server delivers the dish to your table, but with added complexity: the server has negotiated the price of your enchilada plate with the kitchen, and you’ll know the price when you receive the check.
It’s hard to imagine a scenario where customers would settle for this arrangement. Yet, in the pharmaceutical industry, this happens daily.
Pharmacy benefit managers are hired by health insurers to negotiate prescription drug prices and perform other tasks like deciding which drugs a health plan will cover. Rebates and other price concessions from drugmakers totaled more than $187 billion in 2020, but those financial savings don’t reach patients’ wallets. Acting as middlemen in an opaque system, pharmacy benefit managers are often compensated based on the difference between the discount they negotiate and the list price of a medicine. This practice creates misaligned incentives that could lead managers to favor drugs with higher list prices. Collecting honest compensation for services is understandable, but pocketing patient savings and driving up costs is a mistake.
A new analysis found that non-manufacturer stakeholders — drug benefit managers, governments, health plans, hospitals and others — received more than half of total brand-name drug spending. Part of a trend, as biopharmaceutical companies that develop and manufacture drugs retain a lower share of total spend, while rebates and rebates negotiated with pharmacy benefit managers and other supply chain intermediaries steadily increase .
Industry consolidations and mergers compound the problem; nearly 80% of all prescription equivalent claims are handled by the three largest drug benefit managers. To compound the problem, the largest drug benefit managers are also affiliated with some of the largest health insurers and pharmacies in the country. This lack of competition hurts one party the most: the consumer; or, in the case of health care, sick patients in need of medication.
Texas has begun to step up efforts to protect patients and establish transparency among drug benefit managers. Recent legislation added a new chapter to the Texas Health and Safety Code titled “Drug Cost Transparency”. The code requires drug benefit managers and health benefit plans to submit annual reports on Texas prescription drug costs, which are then posted on the Texas Department of Insurance website. The 2020 report is telling: According to data for the 2020 calendar year, drugmakers paid $2.3 billion to 24 reporting drug benefit managers. Pharmacy benefit managers retained more than $476 million in revenue (20.6%); $1.8 billion (78.95%) was transferred to issuers and the remaining 0.45% was transferred to registrants.
This action is a step in the right direction, but more work can be done — and must be done to help Texans. Patients should not struggle to afford the drugs they need because middlemen have decided that patients who pay for the drugs should not receive discounts. Pharmacy benefit managers should be required to pass on rebates and rebates from drug manufacturers to the patients – for whom they are intended – at the pharmacy counter.
A law passed in West Virginia provides a solid framework from which Texas can work. The law requires pharmacy benefit managers to pass on drug discounts to consumers at the point of sale. Texas has an opportunity to lead here, using the strong starting point provided by West Virginia law. To further protect patients and correct misaligned incentives present in the current supply chain, Texas could also prohibit pharmacy benefit managers from profiting from the difference between the discounts they negotiate and the list price of a drug. .
With research showing that 30% of Americans who have insurance still face a financial barrier to care, such as out-of-pocket expenses beyond what they can afford, we need to address what is really driving up costs for patients at the pharmacy counter. We call on state officials, as well as others in the healthcare system, to join us in supporting common-sense reforms to ensure patients can access and pay for the medicines their doctors prescribe.
— Victoria Ford is President and CEO of the Texas Healthcare and Bioscience Institute.